01/2024 - Principles & Outlook
Full written article below.
In 2022, the Dow Jones, S&P 500, and Nasdaq 100 indexes all experienced declines of 21%, 25%, and 35% respectively. Then, close to Christmas time 2023, all three were in new high ground, on a total return basis which includes dividends.
Why the market declined and recovered I’ll argue is actually less important than that it actually did recover, and do what it’s always historically done over the past 100 years, recover to new higher ground.
There’s a seemingly endless number of market commentators, and I sincerely doubt any of them got it “right” over the past two years. Because if any of these market commentators did get it right, you better believe there’d be an all-out marketing blitz to tell everyone they were right, I haven’t seen anything yet…
But now as we turn from one year to the next, I always like to restate the Core Investment Principles as well as highlight some current Economic Commentary.
Core Investment Principles
- The economy and markets cannot be consistently forecasted.
- When owning stock or equities, we are then long-term owners of these businesses.
- Declines in investment markets are frequent but have historically always recovered to new higher ground. CapitalGroup.com
- Long-term investment success most reliably rests on developing a long-term financial plan and then continually acting on that plan.
- We define “money” as purchasing power. How much can you buy with what you have.
- The goal of long-term investing is to increase your purchasing power.
- Using history as a guide, owning stock in a company provides significantly higher returns than owning debt/bonds in a company. Since 1957, the S&P 500 has returned about 7% and the Bond index at about 3%, both adjusted for inflation. Yahoo Finance
- An investment’s safety, must not only look at short-term price swings, but more-so the long-term total return potential above inflation. The excess return, above inflation, is what we should be focused. Why should we be focused here? When planning for a multi-decade retirement of income replace and asset transfer, we not only need to create income for year 1 of retirement, but also for year 30-40 of retirement.
Economic Commentary
- The economic disruptions resulting from the COVID pandemic are still working themselves through the economy.
- The primary financial response to COVID was a 40% expansion in M2, money supply, by the Federal Reserve. Which then increased inflation. Any long-time reader of my newsletter would be familiar with my tracking of this over the years.
- To reduce inflation, the Fed increased interest rates at the quickest rate seen in the past 100 years. The equity and bond markets both responded negatively.
- Even with the quick increase in interest rates and surging inflation, the economy continued to chug along with next to full employment.
- Inflation has come down, but price levels remain high and are currently causing a strain to middle-class budgets.
- Capital and Investment markets have recovered from their lows in 2022 with speculation on how much the Fed may reduce interest rates in 2024 and if there may be a recession.
- Uncertainties continue to dominate news headlines both foreign and domestic. Ukraine/Russia, Israel/Palestine, Iran, North Korea, Yemen, and others. Trends in the U.S. debt levels coupled with Social Security, Medicare, and other entitlement spending appear to be on paths to insolvency. And don’t forget about an upcoming Presidential election.
- Uncertainties in the market have always been and will likely always be with us. So unless you’re convicted that the world is going to end, my encouragement is to have faith that the world won’t end. With the faith that the world won’t end, let’s then invest in what has historically been the best place to invest our hard-earned capital.
Additional Data: Each month I get asked by clients what additional resources I’m looking at. Please hear me in stating I’m not trying to predict anything whatsoever, just some of the interesting data I’m watching.
- Did We Just Hit Bottom? – Was my blog post from Nov 2022, where I make the argument that we may have hit bottom, we still need another year or so to know if I was right or wrong. Regardless, since the date cited, the markets are up close to 21% (dates from 10/13/22 to 09/06/23 source: Yahoo Finance)
- Robert Kiyosaki of the famed Rich Dad Poor Dad book is what would be called a permabear, someone who is a doomsdayer. And well, to be kind, he’s been dead wrong. In this post from Ben Carlson, Ben does a wonderful job putting Kiyosaki in his place.
- Global Currency – There continues to be a lot of noise over what will be the Global Currency going forward. It does seem that most of the writers of articles like this are financially illiterate. They all seem to miss the point that the dollar isn’t strong because it’s the world’s reserve currency. The dollar is strong because of its inherent strengths. This article from the Visual Capitalist shows the rise of the dollar since 1900.
- 6.1 Trillion in Money Markets – At it’s highest level every reported, there’s 6.1T in money market funds. In the investing market, this is called “Dry Powder.” These are dollars enjoying higher levels of interest than in years past. But ask yourself, what do you think will happen when/if the Federal reserve starts to cut interest rates and banks start paying less in interest on these accounts? Do you really think people will just continue to hold their funds with less interest, or do you think they’ll look for other alternatives to make money? My guess is assuming interest rates come down, these people will start to move some of these funds back into the broader market. So what do you think would likely happen to market prices if this does occur?
- BLS.gov - continued PPI reduction, peak was in March 2022.
- Breakeven Inflation Rate - Federal Reserve – 5-Year Breakeven inflation rate is now 2.19%. When you study this chart, you’ll see it goes back to 2004.
- Federal Reserve Balance sheet – For months the Fed was following through on it’s statement made in May 2022 of reducing the balance sheet by 47.5 billion per month in months June-Aug 2022, then reducing the balance sheet by 95 billion per month. But, just recently, you’ll see the balance sheet spike up by 300 billion with the new bank lending program but then a quick reversal. We’re now down about 1.3 Trillion from the peak value. Headed the right direction, long way still to go.
Market Truths
1. The Stock Market cannot be consistently known or timed
2. The Economy (as you define it) cannot be consistently known or timed
3. Over the past 100 years, the market has returned 10.45% (with dividends reinvested). It’d be difficult for someone to achieve this return if they did not simply stay invested. Data Source
4. The average intra-year market decline is about 14% and the market drops 15% or more every 3 years. J.P. Morgan | American Funds
5. Investing in equities has historically been volatile, my guess is it always will be, however when you consider equities (using the S&P 500 as a proxy), Real Estate, short-term bonds and corporate bonds, over the long-term, equities continue to be the historical winner. To crystallize this point, just look for yourself NYU.edu.
Market Beliefs
1. Because the future cannot be known, we must embrace the belief that the world isn’t going to end during our lifetimes, and if it does, our money doesn’t matter
2. The world has continued to advance, since well before Jesus walked the earth, so assuming the world doesn’t end, it’s rational to believe the world will continue to advance
In closing: We of course cannot control what the market does from here and we cannot predict when the next market downturn will occur. But we can control our behavior to these outside events and continue to stick with our long-term investment strategy.
As always, if you have any questions/concerns please contact me.
David Hobbs, CFP®
Wealth Advisor | Owner
Hobbs Wealth Management
Standard & Poor’s 500 (S&P 500) - a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.
Russell 2000 – The index measures the performance of the small-cap segment of the US equity universe. It is a subset of the Russell 3000 and includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
MSCI ACWI ex USA – The index measures the performance of the large and mid-cap segments of the particular regions, excluding USA equity securities, including developed and emerging market. It is free float-adjusted market-capitalization weighted.
Federal Funds Rate - refers to the target interest rate set by the Federal Open Market Committee (FOMC). This target is the rate at which commercial banks borrow and lend their excess reserves to each other overnight.
This report was prepared by Hobbs Wealth Management a State registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Neither the information nor any opinion expressed it so be construed as solicitation to buy or sell a security of personalized investment, tax, or legal advice. For more information please visit: https://adviserinfo.sec.gov/ and search for our firm name.
This newsletter is prepared to provide a degree of insight into the analysis used by Hobbs Wealth Management to make investment decisions. It is not a complete description of all factors used by Hobbs Wealth Management to make decisions on behalf of clients. The opinions included are not intended to be taken as fact, but are Hobbs Wealth Management’s interpretation of the impact of external events on investments.
The information herein was obtained from various sources. Hobbs Wealth Management does not guarantee the accuracy or completeness of information provided by third parties. The information in this report is given as of the date indicated and believed to be reliable. Hobbs Wealth Management assumes no obligation to update this information, or to advise on further developments relating to it.
This article contains external links directing you to a third-party website. Although we have reviewed the website prior to creating the link, we are not responsible for the content of the sites.
An index is an unmanaged portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.
The mention of specific securities and sectors illustrates the application of our investment approach only and is not to be considered a recommendation. The specific securities identified and described herein do not represent all of the securities purchased or sold for the portfolio, and it should not be assumed that investment in these securities were or will be profitable. There is no assurance that the securities purchased remain in the portfolio or that securities sold have not been repurchased. For a complete list of holdings please contact your portfolio advisor.